2016 Annual Report. Innovation in Sight

Transcription

1 2016 Annal Report Innovation in Sight

2 Table of contents 4 Safe harbor for forward-looking statements 5 Innovation in sight 6 Otpacing or markets 8 Growing in a flat environment 10 Bilding capacity 11 Consistency and delivery 12 The ideal camera soltion 13 Next generation HomeLink 14 Connecting the car to infrastrctre The ftre of atomotive technology is the combination of mirrors, cameras and other advanced technologies. 15 Biometrics secrity and convenience at a glance 16 Bringing new growth stories to the market 17 Fire protection and aerospace 18 Or 10K year smmary 70 Corporate data 71 Officers and directors 2 / 71

3 Innovation in sight Gentex develops high-vale safety and technology prodcts that make the world a safer, simpler and smarter place. Gentex is an indstryleading spplier of advanced chemical, optical, and electronic prodcts for the global atomotive indstry. We spply every major atomaker worldwide with advanced electronic featres that optimize driver vision and enhance driving safety and convenience. Since or inception, Gentex has managed the evoltion of the rearview mirror. Alongside or cstomers, we have refined inside and otside mirrors, trning them from simple prismatic mirrors into strategic electronic modles delivery mechanisms for in-demand fnctionality and featres, inclding camera systems, alerts, displays and driver interfaces. As or technologies and capabilities contine to grow, or prodct offering is changing the way atomotive manfactrers think abot how their cstomers interact with their vehicles. Or core competencies electronics and microelectronics, vision systems and cameras, software, chemistry and glass processing are qickly enabling new innovation in an indstry focsed on convenience, safety, and fnctionality. Throgh every cycle, Gentex remains a globally-focsed provider of rapidly advancing technology that is driving the atomotive indstry forward. ELECTRONICS MICROELECTRONICS ENGINEERING We view GNTX as a highly innovative technology company that happens to operate within the ato parts sector. CHEMISTRY/COATINGS DISPLAYS AUTOMATED ASSEMBLY Safe Harbor for Forward-Looking Statements This Annal Report and Form 10-K contains forward-looking statements within the meaning of the safe harbor provisions of the Private Secrities Litigation Reform Act of The statements contained in this commnication that are not prely historical are forward-looking statements. Forward-looking statements give the Company s crrent expectations or forecasts of ftre events. These forward-looking statements generally can be identified by the se of words sch as anticipate, believe, cold, estimate, expect, forecast, goal, hope, may, plan, project, will, and variations of sch words and similar expressions. Sch statements are sbject to risks and ncertainties that are often difficlt to predict and beyond the Company s control, and cold case the Company s reslts to differ materially from those described. These risks and ncertainties inclde, withot limitation, changes in general indstry or regional market conditions; changes in consmer and cstomer preferences for or prodcts (sch as cameras replacing mirrors and/or atonomos driving); or ability to be awarded new bsiness; contined ncertainty in pricing negotiations with cstomers; loss of bsiness from increased competition; changes in strategic relationships; cstomer bankrptcies or divestitre of cstomer brands; flctation in vehicle prodction schedles; changes in prodct mix; raw material shortages; higher raw material, fel, energy and other costs; nfavorable flctations in crrencies or interest rates in the regions in which we operate; costs or difficlties related to the integration and/or ability to maximize the vale of any new or acqired technologies and bsinesses; changes in reglatory conditions; warranty and recall claims and other litigation and cstomer reactions thereto; possible adverse reslts of pending or ftre litigation or infringement claims; changes in tax laws; import and export dty and tariff rates in or with the contries with which we condct bsiness; negative impact of any governmental investigations and associated litigations inclding secrities litigations relating to the condct of or bsiness. Readers are cationed not to place nde reliance on these forward-looking statements, which speak only as of the date they are made. The Company ndertakes no obligation to pblicly pdate or revise any forward-looking statement, whether as a reslt of new information, ftre events or otherwise, except as reqired by law or the rles of the NASDAQ Global Select Market. The following risk factors, together with all other information provided in this Annal Report shold be careflly considered. RYAN BRINKMAN, J.P. Morgan Janary 30, 2017 GLASS PROCESSING SOFTWARE DESIGN VISION SYSTEMS/CAMERAS 4 / 71 5 / 71

4 Otpacing or markets A Snapshot of 2016 As the global atomotive marketplace looks for new ways to bring advanced technology to consmers, Gentex remains an integral piece of the pzzle. Or technology provides OEMs with a platform throgh which to offer niqe, profitable prodcts that consmers demand, withot having to add nnecessary costs to their bill of materials. In short, as more Gentex technology is inclded in a vehicle, the profitability of that vehicle increases as well M Mirrors Shipped million In 2016, abot half of or growth came from increasing penetration onto new vehicles, and the other half came from increasing advanced featre content in vehicles. We believe this trend of increasing consmer demand for technology is global, and paves the way for ftre content growth M $ B 2001 Employees 1,700 Global Penetration $1600 $1400 Revenes (in millions) $1200 $1000 $800 $600 $400 $ M Year ,315 Gross Margin and Operating Margin Gross 39.3% 39.8% Operating 26.4% 30.5% % IEC 4% OEC Market Share (Electrochromic) % % IEC t 8% OEC t % 2016 Performance Retrned to Shareholders 9% Unit shipment growth $101M cash dividends paid 9% Revene growth DIVIDEND: 35.5 per share 9% Net income growth $163M of reprchased common stock 10% Earnings per dilted share growth 10.3M shares reprchased 1,208 Patents 566 U.S. 642 foreign Gentex Intellectal Property 281 Registered Trademarks 33 U.S. 248 foreign 657 Applications In Process 276 U.S. patents 252 foreign patents 129 trademarks 6 / 71 7 / 71

5 Growing in a flat environment 2017 & 2018 Gidance Or 2017 and 2018 gidance is bilt from the 2017 IHS Atomotive vehicle prodction estimates. The atomotive indstry has a history of cyclicality, bt or gidance reiterates or belief that technological advancement and demand from consmers will help s grow in a relatively flat primary market throgh increased market penetration and increased content per vehicle. Light Vehicle Prodction (per IHS Atomotive Mid-Janary light vehicle prodction forecast) (in millions) Ato-dimming Mirror Shipments (Thosands) 26,025 (23,517 in % increase) + = 10,077 (9,468 in % increase) 36,102 (32,986 in % increase) Region Calendar Year 2018 Calendar Year 2017 Calendar Year vs % Change 2017 vs % Change North America % (1%) Erope % 1% Japan and Korea (2%) 3% Total Light Vehicle Prodction % 1% 2017 Gidance REVENUE $1.78 $1.85 billion 6% 10% GROSS MARGIN 39.0% 40.0% OPERATING EXPENSES (E, R&D and S, G&A) $165 $172 million TAX RATE 31.5% 32.5% CAPITAL EXPENDITURES $115 $130 million DEPRECIATION + AMORTIZATION $95 $105 million NORTH AMERICAN SHIPMENTS +6% ,698 11,984 INTERNATIONAL SHIPMENTS +11% ,404 21,002 9,068 8,649 +5% 16,957 14, % 2018 GUIDANCE: over and above 2017 revene estimates by approximately 6% 10% 3,631 3,335 +9% Domestic Transplants * % % % % % % % % North America % % % % 6,447 6,133 +5% Erope Asia-Pacific % % % % % % % % * Eropean and Asian based atomakers with atomotive prodction plants in North America 8 / 71 9 / 71

6 Bilding capacity Consistency and delivery In 2016, we bilt over 36,000,000 Camps Capacity (inclding North Riley) 30 33M 13 15M ato-dimming mirrors. ZEELAND, MI CAMPUS In the past few years, abot half of or growth has come from increasing nit sales, and the other half has come from increasing advanced featres. We anticipate this trend to contine, and are excited abot or ability to grow in the next two years throgh increasing vehicle penetration and the increasing adoption of advanced featres. Today s consmers, inclding those bying smaller vehicles, are demanding technology in their vehicles, and Gentex provides an easy, profitable way for atomotive manfactrers to meet those demands. Like most other technology, the atomotive design cycle is accelerating. However, vehicles are significantly more complex than consmer electronics, and will always be held to a higher standard for performance and safety. The stakes are simply higher in atomotive. Becase of this, or new program wins in 2017 typically will not begin shipping for 2 4 years. Once they start shipping, or prodcts typically rn the life of the vehicle model, which tend to be arond 4 6 years. What this means for Gentex is that we have a solid nderstanding of what vehicles we will be available on, not jst in 2017 and 2018, bt ot into The new prodcts yo will see in the coming pages are important becase they represent what we believe will be the basis for or growth over the next decade. By 2018, abot 1/3 of or mirrors will be frameless. By 2019, we anticipate Fll Display Mirror to have an annal rn rate of over 500,000 nits. North Riley Camps Room to Grow Gentex Revene Growth New prodction facility was sed for distribtion in 2016, and will begin manfactring in Gentex also holds 200 acres of ndeveloped property. 18% 16% 14% Gentex GmbH In 2016, the Company completed a 50,000 sqare-foot expansion. International With sales, spport and marketing offices in: Germany Sweden China United France Korea Japan Kingdom Growth Rate 12% 10% 8% 6% 4% Cstomers Core Compentencies Content In 2016, we shipped to 30 OEM cstomers. Electronics & Microelectronics We are on over 500 vehicle nameplates. Vision Systems & Cameras Software Design Chemistry and Coatings Atomated Assembly Glass Processing 2% 0% Gentex Revene Growth IHS Light Vehicle Prodction (Global) IHS Light Vehicle Prodction (Key Markets) 10 / / 71

7 The ideal camera soltion Next generation HomeLink Gentex s Camera Monitoring System As camera technology has improved throghot the years, researchers and designers have discssed and debated the ideal locations for cameras and displays within an atomobile. At CES in Janary, we nveiled a new three-camera rear vision system that streams rear video in mltiple composite views to a rearview mirror-integrated display. This new technology tilizes or Fll Display Mirror (FDM), and we believe it is the indstry s first practical and comprehensive rear vision soltion designed to meet atomaker, driver, safety and reglatory reqirements. Optionality niqe packaging and performance gives atomakers an ideal pgrade path for each trim package Fnctionality mltiple display options increase ser convenience HomeLink meets Bletooth HomeLink has long-been the world s most trsted and sed vehiclebased wireless control system. It connects yor vehicle to yor home, controlling lights, gates, garage doors and more. In or third year of ownership, Gentex showed a prototype version of HomeLink at CES that brings its fnctionality to a new level, by adding Bletooth Low Energy (BLE) capability into the HomeLink modle. Instead of interacting with mltiple apps, HomeLink will enable single-btton control of a site of fnctions Complete garage door The Gentex camera monitoring system (CMS), ses three cameras to Fails safe defalts as an compatibility and control provide a comprehensive view of the sides and rear of the vehicle. The side-view cameras are discretely hosed in downsized, exterior ato-dimming mirror, so the ser always has visibility Qick, easy set-p mirrors, redcing vehicle drag. The otside mirror-based camera feeds are combined with a roof-monted camera feed and shown together in mltiple composite views within the Fll Display Mirror. This way, the driver can choose their preferred display option, or revert to an Redced drag smaller otside mirrors help redce vehicle drag With BLE, HomeLink can control significantly more devices, while still controlling existing RF devices. With a single btton press, HomeLink sends ot two signals simltaneosly: one to yor garage door, and the other, a BLE signal, to yor phone. Yor garage door responds immediately, and yor phone, throgh a HomeLink (or OEM-branded) app, interacts with any nmber of other apps concrrently, to control a site of other clod ato-dimming mirror at their discretion. based devices. With a single btton press, yo will now be able to control yor garage door, home lights, thermostat, secrity system, appliances, and other clod-based home atomation devices. The possibilities are endless, and the connectivity remains nmatched. Segmented Spotter Active Spotter Stitched 12 / / 71

8 Connecting the car to infrastrctre Biometrics secrity and convenience at a glance In-vehicle Payment Capability The Gentex Integrated Toll Modle (ITM ) is a nationwide toll collection technology for factory integration into new vehicles. The system ses a mirror-integrated mlti-protocol toll tag that provides motorists with access to toll roads throghot the U.S. The system allows atomakers to offer yet another connected-car featre to their cstomers and benefit from an ideal, high-performance transponder location. For drivers, it s an added layer of convenience, aesthetics and performance. The windscreen or mirror-based tolling soltion gives convenient, nfettered access to the contry s toll roads while eliminating toll-tag windscreen cltter and the need to manage mltiple toll acconts. In the ftre, we believe this toll payment capability cold be expanded to inclde other systems, enabling in-vehicle payment for everything from gasoline and coffee, to parking meters and parking garages. ITM provides a profitable, scalable platform on which new payment interactions can occr, and opens p the door for an increasingly connected car. Removes windshield transponder for a clean, elegant interior US toll roads (crrent and ftre) will have readers that read one or more of the protocols within the ITM First program lanch expected in CY2019 At the CES this Janary, one of the most talked-abot nveilings for Gentex was or biometrics mirror, created in partnership with DeltaID, a leader in biometrics and iris scanning technology. For Gentex, biometrics provides a key component for ftre vehicle safety, convenience and interaction. It is the gate throgh which all ftre technology can be controlled, ensring that only the intended individal or grop has access to the vehicle s controls. The primary se cases of in-vehicle biometrics are athentication, application of cstomized secrity, and comfort and convenience featres. Imagine an iris scan that not only starts the vehicle, bt personalizes mirror adjstments, HomeLink settings, ITM accont information, steering wheel and seat positions, msic favorites, and loads a ser s primary GPS locations. This type of secrity cold also nderpin the secrity of vehicle-to-home atomation services and vehicle-to-infrastrctre transactions. The entire system can be discretely integrated into a Gentex ato-dimming rearview mirror. The mirror is the ideal integration Iris recognition is the most secre form of non-invasive biometric identification, with a false acceptance rate as low as one in 10 million, far sperior to facial, voice, or most other methods. Cross-fnctionality potentials Driver identification Vehicle personalization Payment athorization Ride sharing access Mirror-integrated soltion for easy vehicle application Helps secre and enhance vehicle-to-home atomation services and vehicle-toinfrastrctre transactions position, as it s a natral location for the driver to look when entering the vehicle. In addition, it provides a consistent featre location across vehicle platforms and can share other electronic components. Ftre car-to-infrastrctre payment applications may inclde: Restarants Gas stations Vehicle services (oil changes, car washes, etc.) Parking strctres/event parking Parks and destinations with paid entry Other services *Gentex ITM tilizes the Universal Toll Modle technology developed by TransCore, a leader in electronic transportation soltions. Gentex has an exclsive license to integrate TransCore technology in atomotive/lightweight vehicle applications. The company s steady transition toward more technology-driven revene contines to be a key theme, and we think the biometric athentication system, in particlar, demonstrates the team s innovative capabilities. CHRIS VAN HORN, FBR Janary 13, / / 71

9 Bringing new growth stories to the market Aerospace and fire protection Gentex is constantly working to identify new opportnities inside and arond or traditional markets. We have a proven track record of sccessfl collaborations, partnerships and acqisitions that rn throghot or history and prodct portfolio. When combined with or own internal research and development, Gentex is able to achieve a niqe synthesis of technology and manfactring that helps s stand ot from or competition. Strategic Developments Gentex electronically dimmable windows present Windows featre high-speed transition between Aerospace aircraft operators, designers, passengers and crew clear and dark members with an opportnity to experience air travel in a new and innovative way an experience at their fingertips. New chemistry for ltra-dark low-end transmission Innovative thin-film coatings redce harmfl IR and UV light Drability and robst design helps lower operating costs SmartBeam Photobit Eqity Stake in 1998 HomeLink Licensed in 1999 Acqired from JCI in = $39.2 million (p 7% from 36.7M in 2015) ITM Partnership with Transcore in 2015 Biometrics Delta ID Partnership in 2016 Fire Protection In 1974, Gentex revoltionized the indstry with the world s first dal-sensor photoelectric smoke detector a device less prone to false alarms, yet qick to detect slow, smoldering fires. Or fire protection prodcts contine to provide a safer, smarter place to live and work. 15% Sales growth year-over-year We contine to view GNTX as a very high qality company with core competencies that go far beyond simply making mirrors and believe the company is proving that with the recent lanches. RICHARD CARLSON, BMO Janary 17, 2017 CMS Co-development with Ambarella in / / 71

10 PART I Item 1: Bsiness (a) General Development of Bsiness Gentex Corporation (the "Company") designs and manfactres atomatic-dimming rearview mirrors and electronics for the atomotive indstry, dimmable aircraft windows for the aviation indstry, and commercial smoke alarms and signaling devices for the fire protection indstry. The Company s largest bsiness segment involves designing, developing, manfactring and marketing interior and exterior atomatic-dimming atomotive rearview mirrors that tilize proprietary electrochromic technology to dim in proportion to the amont of headlight glare from trailing vehicle headlamps. Within this bsiness segment, the Company also designs, develops and manfactres varios electronics that are vale added featres to the interior and exterior atomotive rearview mirrors as well as interior visors, overhead consoles, and other locations in the vehicle. The Company ships its prodcts to all of the major atomotive prodcing regions worldwide, which it spports with nmeros sales, engineering and distribtion locations worldwide. The Company was organized as a Michigan corporation in 1974 to manfactre smoke detectors, a prodct line that has since evolved to inclde a variety of fire protection prodcts. In 1982, the Company introdced an interior electro-mechanical atomatic-dimming rearview mirror as an alternative to the manal day/night rearview mirrors for atomotive applications. In 1987, the Company introdced an interior electrochromic atomatic-dimming rearview mirror for atomotive applications. In 1991, the Company introdced an exterior electrochromic atomatic-dimming rearview mirror for atomotive applications. In 1997, the Company began making volme shipments of three new exterior mirror sb-assembly prodcts: thin glass flat, convex and aspheric. In 2005, the Company began making volme shipments of its new bezel-free exterior atomatic-dimming mirror. In 2005, the Company annonced, and in 2010 began delivering electrochromic dimmable aircraft windows for the aviation indstry. In 2013, the Company acqired HomeLink, a wireless vehicle/home commnications prodct that enables drivers to remotely activate garage door openers, entry door locks, home lighting, secrity systems, entry gates and other radio freqency convenience prodcts for atomotive applications, wherein the Company had previosly been a licensee of HomeLink and had been, since 2003, integrating HomeLink into its interior atomatic-dimming rearview mirrors. In 2015, the Company began making shipments of the Fll Display Mirror, which is an on-demand, mirror-borne LCD display that streams live, panoramic video of the vehicle's rearward view in order to improve driver rear vision. Also in 2015, the Company signed an exclsive agreement in the ordinary corse of bsiness with TransCore LLP to integrate TransCore's toll modle technology into the vehicle in a firstto-market application referred to as Integrated Toll Modle or "ITM". The interior mirror is an optimal location for a vehicle-integrated toll transponder and it eliminates the need to affix mltiple toll tags to the windshield. In 2016 (annonced in 2017), the Company signed an agreement entered into the ordinary corse of bsiness with VOXX to exclsively distribte in the aftermarket the Gentex Aftermarket Fll Display Mirror in North America. Also recently, the Company displayed a new three-camera rear vision system that streams rear video in mltiple composite views to a rearview-mirror-integrated display. The Company also annonced an embedded biometric soltion for vehicles that leverages iris scanning technology to create a secre environment in the vehicle. There are many se cases for athentication, which range from vehicle secrity to start fnctionality to personalization of mirrors, msic, seat location and temperatre, to the ability to control transactions not only for the ITM system bt also the ride sharing car of the ftre. Delta ID has developed an ActiveIRIS technology that combines niqe iris-recognition software with a simple hardware set that can be easily integrated into mobile compting devices. Delta ID s technology powers iris recognition on smartphones, tablets and other devices crrently, and is a proven leader in biometric identification. The Company and Delta ID recently completed a strategic partnership agreement in the ordinary corse of bsiness for atomotive applications. Atomotive revenes represent approximately 98% of the Company's total revene, consisting of interior and exterior electrochromic atomatic-dimming rearview mirrors and atomotive electronics. (b) Financial Information Abot Segments See Note 7 to the Consolidated Financial Statements filed with this report. (c) Narrative Description of Bsiness The Company is a spplier of atomatic-dimming and non-atomatic-dimming rearview interior and exterior mirrors and electronics to the atomotive indstry, dimmable aircraft windows for aviation markets, and fire protection prodcts to the fire protection market. forward safety camera systems, varios lighting systems, varios telematics systems, ITM systems, and a wide variety of displays. The Company also ships interior non-atomatic-dimming rearview mirrors with featres. The Company s interior electrochromic atomatic-dimming rearview mirrors also power the application of the Company s exterior electrochromic atomatic-dimming rearview mirrors that darken to redce glare and improve visibility for the driver. These electronic exterior mirrors typically range in size and shape per atomaker specification, bt also inclde additional featres sch as trn signal indicators, side blind zone indicators, and cortesy lighting. The Company also ships exterior non-atomatic-dimming rearview mirrors with similar electronic featres available in its atomatic-dimming applications. The Company manfactres other atomotive electronics prodcts both inside and otside of the rearview mirror throgh HomeLink applications in the vehicle inclding the rearview mirror, interior visor, overhead console, or center console. The Company prodces rearview mirrors and electronics for atomotive passenger cars, light trcks, pick-p trcks, sport tility vehicles, and vans for original eqipment manfactrers (OEMs) worldwide, tier one atomotive mirror manfactrers worldwide, and varios aftermarket and accessory cstomers. Atomotive rearview mirrors and electronics acconted for 98% of the Company s consolidated net sales in The Company is the leading manfactrer of electrochromic atomatic-dimming rearview mirrors in the world, and is the dominant spplier to the atomotive indstry. Competitors for atomotive rearview mirrors inclde Magna International, YH America, Inc., BYD Ato Company, Mrakami Kaimeido Company, Steelmate, Tokai Rika Company, Ningbo Kingband, Peak Power Atomotive, and Beijing Sincode. The Company also spplies electrochromic atomatic-dimming rearview mirrors to certain of these rearview mirror competitors. Atomotive Rearview Mirrors and Electronics Prodct Development. The Company continally seeks to develop new prodcts and is crrently working to introdce additional advanced-featre atomatic-dimming mirrors. Advanced-featre atomatic-dimming mirrors crrently being offered by the Company inclde, SmartBeam, HomeLink, frameless mirror designs, LED map lamps, compass and temperatre displays, telematics, ITM systems, biometric athentication systems(in development), hands free commnication, as well as Rear Camera Display ("RCD") interior mirrors and Fll Display Mirror ("FDM ") interior mirrors, exterior trn signals, side blind zone indicators and varios other exterior mirror featres that improve safety and field of view. Atomotive Rearview Mirrors and Electronics Markets and Marketing. In North America, Erope and Asia, the Company markets its prodcts primarily throgh a direct sales force tilizing its sales and engineering offices located in Germany, UK, Sweden, France, Japan, Korea and China, as well as its headqarters in Michigan. The Company generally spplies atomatic-dimming mirrors and mirrors with advanced electronic featres to its cstomers worldwide nder annal blanket prchase orders with cstomers, as well as nder long-term agreements with certain cstomers, entered into in the ordinary corse of the Company's bsiness. The Company is crrently spplying mirrors and electronics modles for Adi, BMW, Daimler, FCA Grop, Ford, Fji Heavy, General Motors, Honda, Hyndai/Kia, Infiniti, Jagar/Land Rover, Lexs, Mazda, Mitsbishi, Nissan, Opel, PSA Grop, Renalt, Rolls Royce, SAIC, SEAT, Skoda, Sbar, Szki, Tesla, Toyota, Volkswagen and Volvo. The Company s atomatic-dimming mirror nit shipment mix by region has flctated over the past ten years. The following is a breakdown of nit shipment mix by region in 2016, 2015, 2014, and 2006 calendar years: Domestic 23% 22% 21% 33% Transplants (1) 13% 15% 16% 12% North America 36% 37% 37% 45% Erope 44% 45% 44% 40% Asia-Pacific 20% 18% 19% 15% Total 100% 100% 100% 100% (1) Eropean and Asian based atomakers with atomotive prodction plants in North America. Atomotive Prodcts Atomotive Rearview Mirrors and Electronics. Atomotive applications are the largest bsiness segment for the Company, consisting of interior and exterior electrochromic atomatic-dimming rearview mirrors and atomotive electronics. The Company manfactres interior electrochromic atomatic-dimming rearview mirrors that darken to redce glare and improve visibility for the driver. These electronic interior mirrors can also inclde additional electronic featres sch as compass, microphones, HomeLink, lighting assist and driver assist Revenes by major geographic area are disclosed in Note 7 to the Consolidated Financial Statements. Historically, new safety and comfort and convenience options have entered the original eqipment atomotive market at relatively low rates on top of the line or lxry model atomobiles. As the selection rates for the options on the lxry models increase, they generally become available on more models throghot the prodct line. The ongoing trend of domestic and foreign atomakers is to offer several options as a package. The Company believes that its atomatic-dimming mirrors with and withot advanced featres will be offered in 18 / / 71

11 more option rate packages, and contine to be available on more small and mid-size vehicle models as consmer awareness of these safety and comfort and convenience featres contines to grow, and as the Company contines its efforts to make atomakers aware of the Company's technology available on competitive vehicle platforms. Atomotive Rearview Mirrors and Electronics Competition. The Company contines to be the leading prodcer of atomatic-dimming rearview mirrors in the world and crrently is the dominant spplier to the atomotive indstry with an approximate 92% market share worldwide in 2016 and an approximate 91% market share in While the Company believes it will retain a dominant position in atomaticdimming rearview mirrors for some time, another U.S. manfactrer, divisions of Magna International Inc. ("Magna") a wholly-owned sbsidiary of Magna International, contines to compete for sales to domestic and foreign vehicle manfactrers and is spplying a nmber of domestic and foreign vehicle models with its versions of ato-dimming mirrors and may have considerably more resorces available to it. As sch, Magna may present a formidable competitive threat. The Company also contines to sell atomatic-dimming exterior mirror sb-assemblies to Magna Mirrors, a wholly-owned sbsidiary of Magna. In addition, a Japanese manfactrer (Tokai Rika) is crrently spplying a few vehicle models in Japan with solid-state electrochromic mirrors. There are also a small nmber of Chinese domestic mirror sppliers that are marketing and selling atomatic-dimming rearview mirrors, in low volme, within the domestic China atomotive market. However, the Company believes that these Chinese domestic mirror sppliers do not crrently meet global atomotive grade specifications. On September 27, 2013, the Company completed its acqisition of HomeLink. Crrently, the Company is the sole spplier of wireless in-vehicle commnication devices to the atomotive indstry for commnication with garages, gates, parking barriers, and certain home atomation prodcts. HomeLink bsiness contines to be awarded to the Company either throgh its atomatic-dimming rearview mirrors, or throgh HomeLink electronic modles which are integrated into other areas of the atomobile (i.e. visors, overhead consoles, and center consoles). In 2014, the Company annonced HomeLink for applications for alternative atomobiles and vehicle types which inclde bt are not limited to motorcycles, mopeds, snowmobiles, tractors, combines, lawn mowers, loaders, backhoes and golf carts. These prodct developments will tilize the market leading HomeLink V system of commnication to the home, door locks, garage doors, gates, lights, secrity systems, and an increasing array of home atomation prodcts. The Company believes it is being awarded virtally all bsiness in this area and that while the Company believes it contines to maintain a competitive advantage in this area, the increased focs on vehicle and home connectivity throgh other devices, represents a longer term competitive threat to this bsiness. The Company believes its electrochromic atomatic-dimming mirrors and mirrors with advanced electronic featres offer significant performance advantages over competing prodcts and the Company makes significant research and development investments to contine to increase and improve the performance advantages of its prodcts. There are nmeros other companies in the world condcting research on varios technologies, inclding electrochromics, for controlling light transmission and reflection. The Company crrently believes that the electrochromic materials and manfactring process it ses for atomotive mirrors remains the most efficient and cost-effective way to prodce sch prodcts. While atomatic-dimming mirrors sing other technologies may eliminate glare, the Company crrently believes that each of these technologies have inherent cost or performance limitations as compared to the Company's technologies. As the Company contines to expand its atomatic-dimming mirror prodcts with additional advanced electronic featres and expands the capabilities of its CMOS imager technology for additional featres (i.e. SmartBeam, FDM, driver-assist featres, rear video camera, etc.), the Company recognizes that it is competing with considerably larger and more geographically diverse electronics companies that cold present a formidable competitive threat in the ftre as new prodcts/featres and technologies are broght to market. Dimmable Aircraft Windows The Company provides variably dimmable windows for the passenger compartment on the Boeing 787 Dreamliner Series of Aircraft. The Company contines to ship parts for the Boeing 787 Dreamliner Series of Aircraft. Markets and Marketing. The Company markets its variably dimmable windows to aircraft manfactrers globally. Competition. The Company s variably dimmable aircraft windows are the first commercialized prodct of its type for original eqipment installation in the aircraft indstry. Other manfactrers are working to develop and sell competing prodcts tilizing other technology in the aircraft indstry for aftermarket or original eqipment installation. The Company s sccess with electrochromic technology provides potential opportnities for other commercial applications, which the Company expects to explore in the ftre when and as the Company feels it is in its best interests to do so. Fire Protection Prodcts The Company manfactres photoelectric smoke detectors and alarms, visal signaling alarms, photoelectric smoke detectors and electrochemical carbon monoxide alarms, electrochemical carbon monoxide detectors and alarms, adible and visal signaling alarms, and bells and speakers for se in fire detection systems in office bildings, hotels, and other commercial and residential establishments. Markets and Marketing. The Company s fire protection prodcts are sold directly to fire protection and secrity prodct distribtors nder the Company s brand name, to electrical wholesale hoses, and to original eqipment manfactrers of fire protection systems nder both the Company s brand name and private labels. The Company markets its fire protection prodcts primarily in North America, bt also globally throgh regional sales managers and manfactrer representative organizations. Competition. The fire protection prodcts indstry is highly competitive in terms of both the smoke detectors and signaling appliance markets. The Company estimates that it competes principally with eight manfactrers of smoke detection prodcts for commercial se and approximately for manfactrers within the residential market, three of which prodce photoelectric smoke detectors. In the signaling appliance markets, the Company estimates it competes with approximately eight manfactrers. While the Company faces significant competition in the sale of smoke detectors and signaling appliances, it believes that the introdction of new prodcts, improvements to its existing prodcts, its diversified prodct line, and the availability of special featres will permit the Company to maintain its competitive position. Trademarks and Patents The Company owns 33 U.S. Registered Trademarks and 566 U.S. Patents, of which 26 Registered Trademarks and 521 patents relate to electrochromic technology, atomotive rearview mirrors, microphones, displays, cameras, sensor technology, and/or HomeLink prodcts. These patents expire at varios times between 2017 and The Company believes that these patents provide the Company a competitive advantage in its markets, althogh no single patent is necessarily reqired for the sccess of the Company's prodcts. The Company also owns 248 foreign Registered Trademarks and 642 foreign patents, of which 242 Registered Trademarks and 623 patents relate to electrochromic technology, atomotive rearview mirrors, microphones, displays, cameras, sensor technology, and/or HomeLink prodcts. These patents expire at varios times between 2017 and The Company believes that the competitive advantage derived in the relevant foreign markets for these patents is comparable to that experienced in the U.S. market. The Company owns 7 U.S. Registered Trademarks, 16 U.S. Patents, 17 foreign Registered Trademarks, and 11 foreign patents that relate to the Company s fire protection prodcts. The US Patents expire between 2017 and 2032, while the foreign patents expire between 2020 and The Company believes that the competitive advantage provided by these patents is relatively small. The Company owns 29 U.S. Patents and 8 foreign patents that relate specifically to the Company s variable dimmable windows. The U.S. Patents expire between 2017 and 2034, while the foreign patents expire between 2021 and The Company also has in process 276 U.S. patent applications, 252 foreign patent applications, and 129 Trademark applications. The Company continosly seeks to improve its core technologies and apply those technologies to new and existing prodcts. As those efforts prodce patentable inventions, the Company expects to file appropriate patent applications. In addition, the Company periodically obtains intellectal property rights, in the ordinary corse of the Company's bsiness, to strengthen its intellectal property portfolio and minimize potential risks of infringement. Miscellaneos The Company considers itself to be engaged in the manfactre and sale of atomatic-dimming rearview mirrors, non-atomatic-dimming rearview mirrors and electronics for the atomotive indstry, variable dimmable windows for the aircraft indstry, and fire protection prodcts for the fire protection indstry. The Company has several important cstomers within the atomotive indstry, three of which each accont for 10% or more of the Company's net sales in 2016 (inclding direct sales to OEM cstomers and sales throgh their Tier 1 sppliers): Volkswagen Grop, Toyota Motor Company, and Ford Motor Company. The loss of any of these cstomers (or certain other significant cstomers) cold have a material adverse effect on the Company's bsiness, financial condition, and/or reslts of operations. The Company s backlog of nshipped orders was $459.6 million and $428.2 million at Febrary 1, 2017, and 2016, respectively. At Febrary 1, 2017, the Company had 5,315 fll-time employees. None of the Company s employees are represented by a labor nion or other collective bargaining representative. The Company believes that its relations with its employees are in good standing. 20 / / 71

12 (d) Financial Information Abot Geographic Areas See the Narrative Description of Bsiness (Item 1(c)) and Note 7 of the Consolidated Financial Statements for certain information regarding geographic areas. (e) Available Information The Company s Annal Report on Form 10-K, qarterly reports on Form 10-Q, crrent reports on Form 8-K, and all amendments to those reports, will be made available, free of charge, throgh the Investor Information section of the Company s Internet website (ir.gentex.com) as soon as practicable after sch materials are electronically filed with or frnished to the Secrities and Exchange Commission ("SEC"). The SEC maintains an Internet website ( that contains reports, proxy and information statements, and other information regarding isses that a company files electronically with the SEC. Item 1A: Risk Factors Safe Harbor for Forward-Looking Statements. This Annal Report contains forward-looking statements within the meaning of the safe harbor provisions of the Private Secrities Litigation Reform Act of The statements contained in this commnication that are not prely historical are forward-looking statements. Forward-looking statements give the Company s crrent expectations or forecasts of ftre events. These forward-looking statements generally can be identified by the se of words sch as anticipate, believe, cold, estimate, expect, forecast, goal, hope, may, plan, project, will, and variations of sch words and similar expressions. Sch statements are sbject to risks and ncertainties that are often difficlt to predict and beyond the Company s control, and cold case the Company s reslts to differ materially from those described. These risks and ncertainties inclde, withot limitation, changes in general indstry or regional market conditions; changes in consmer and cstomer preferences for or prodcts (sch as cameras replacing mirrors and/or atonomos driving); or ability to be awarded new bsiness; contined ncertainty in pricing negotiations with cstomers; loss of bsiness from increased competition; changes in strategic relationships; cstomer bankrptcies or divestitre of cstomer brands; flctation in vehicle prodction schedles; changes in prodct mix; raw material shortages; higher raw material, fel, energy and other costs; nfavorable flctations in crrencies or interest rates in the regions in which we operate; costs or difficlties related to the integration and/or ability to maximize the vale of any new or acqired technologies and bsinesses; changes in reglatory conditions; warranty and recall claims and other litigation and cstomer reactions thereto; possible adverse reslts of pending or ftre litigation or infringement claims; changes in tax laws; import and export dty and tariff rates in or with the contries with which we condct bsiness; negative impact of any governmental investigations and associated litigations inclding secrities litigations relating to the condct of or bsiness. Readers are cationed not to place nde reliance on these forward-looking statements, which speak only as of the date they are made. The Company ndertakes no obligation to pblicly pdate or revise any forward-looking statement, whether as a reslt of new information, ftre events or otherwise, except as reqired by law or the rles of the NASDAQ Global Select Market. The following risk factors, together with all other information provided in this Annal Report shold be careflly considered. Atomotive Indstry. 98% of or net sales are to cstomers within the atomotive indstry. The atomotive indstry has always been cyclical and highly impacted by levels of economic activity. The crrent economic environment, while stable, contines to provide some ncertainty (especially in the Japan and Korean markets) and contines to case increased financial and prodction stresses evidenced by volatile prodction levels, volatility with cstomer orders, spplier part and material shortages, atomotive and tier one spplier plant shtdowns, cstomer and spplier financial isses/bankrptcies, commodity material cost increases, consmer vehicle preference shifts, where we may have a lower penetration rate and lower content per vehicle, and spply chain stresses. If atomotive cstomers (inclding their Tier 1 sppliers) and sppliers experience plant shtdowns, work stoppages, strikes, part shortages, etc., it cold disrpt or shipments to these cstomers, which cold adversely affect or bsiness, financial condition, and/or reslts of operations. Atomakers contine to experience volatility and ncertainty in execting planned new programs which can reslt in delays or cancellations of new vehicle platforms, package configrations, and inaccrate volme forecasts. This makes it difficlt for s to forecast ftre sales and manage costs, inventory, capital, engineering, research and development, and hman resorce investments. Key Cstomers. We have a nmber of large cstomers, inclding three atomotive cstomers which each accont for 10% or more of or annal net sales in 2016 (inclding direct sales to OEM cstomers and sales throgh their Tier 1 sppliers): Volkswagen Grop, Toyota Motor Company, and Ford Motor Company. The loss of all or a sbstantial portion of the sales to, or decreases in prodction by, any of these cstomers (or certain other significant cstomers) cold have a material adverse effect on or bsiness, financial condition, and/or reslts of operations. Pricing Pressres. We contine to experience on-going pricing pressres from or atomotive cstomers and competitors, which have affected, and which will contine to affect or profit margins to the extent that we are nable to offset the price redctions with engineering and prchasing cost redctions, prodctivity improvements, increases in nit shipments of mirrors and electronics with advanced featres, each of which pose an ongoing challenge, which cold adversely impact or bsiness, financial condition, and/or reslts of operations. Competition. We recognize that Magna Mirrors, or main competitor and wholly-owned sbsidiary of Magna International, may have considerably more resorces available to it, and may present a formidable competitive threat. On March 31, 2014, the National Highway Traffic Safety Administration ("NHTSA") issed a final rle reqiring rearview video systems in U.S. light vehicles by May 1, 2018, with a phase-in schedle reqirement of 10% of vehicles after May 2016, 40% of vehicles after May 2017, and 100% of vehicles after May In this release, NHTSA estimated that 57% of model year 2014 vehicles already have a rear video system, and that even withot a final rle, 73% of the vehicles sold into North America wold have already inclded a rearview video system by This NHTSA rling, as is indicated from the percentage of U.S. vehicles already having a rearview video soltion, does not crrently indicate opportnity for new RCD mirror applications for the Company. Cstomer opportnities may exist by the time the 100% reqirement is in place, bt there is no certainty in this regard. The Company s RCD mirror application meets all the technical reqirements of the NHTSA rle when installed in a vehicle and appropriately paired with an OEM specified camera. The NHTSA rle that rearview video systems are reqired has increased competition for systems capable of rear video in a variety of locations in the vehicle. Or RCD mirror application has and will contine to be affected by this increased competition. Or SmartBeam prodct is a driver-assist featre for headlamp lighting control that competes with other mltiple-fnction driver-assist featres that inclde headlamp lighting control as one of the mltiple fnctions. While we believe SmartBeam is a low cost soltion for a safety featre that makes nighttime driving safer by maximizing a vehicle's high-beam sage, competition from mltiple-fnction driverassist prodcts cold impact the long-term sccess of SmartBeam. As we contine to expand the capabilities of or CMOS imager technology, we recognize that we are competing against mltiple-fnction driver-assist technologies that have presented and will contine to present a competitive threat for SmartBeam. Or CMOS imager technology when sed as a rearward facing atomotive video camera is a video camera that competes with other commercially available atomotive video cameras. While we believe or video camera, when combined with or display mirror prodcts, prodces a higher dynamic range than other commercially available atomotive video cameras, we recognize other technologies are highly competitive and these featres are price sensitive. Or ability to market and sell or prodcts may be affected by the high level of competition in this market. On March 31, 2014 the Alliance of Atomobile Manfactrers petitioned the National Highway Traffic Safety Administration to allow atomakers to se cameras as an option to replace conventional rearview mirrors within North America, however, no comment, final rle, or legislation was made in response to this petition. In Jly 2016, a revision to UN-ECE Reglation 46 was pblished with an effective date of Jne 18, 2016, which allows for camera monitor systems to replace mirrors within Japan and Eropean contries. As of Janary 2017, Camera monitoring systems are also permitted as an alternative to replace mirrors in the Korean market. Notwithstanding the foregoing, the Company contines to believe rearview mirrors provide a robst, simple and cost effective means to view the srronding areas of a vehicle and remain the primary safety fnction for rear vision today. Cameras when sed as the primary rear vision delivery mechanism have some inherent limitations sch as: electrical failre; cameras being blocked or obstrcted; depth perception challenges; and viewing angle of the camera. Nonetheless, the Company contines designing and manfactring not only rearview mirrors, bt CMOS imagers and video displays as well. The Company believes that combining video displays with mirrors may well provide a more robst prodct by addressing all driving conditions in a single soltion that can be controlled by the driver. The Company also contines to develop in the areas of imager performance, camera dynamic range, lens design, image processing from the camera to the display, and camera lens cleaning. The Company acknowledges that as sch technology evolves over time, sch as cameras replacing mirrors and/or atonomos driving, there cold be increased competition. Bsiness Combinations. We anticipate that acqisitions of bsinesses and assets may play a role in or ftre growth. We cannot be certain that we will be able to identify attractive acqisition targets, obtain financing for acqisitions on satisfactory terms, sccessflly acqire identified targets or manage timing of acqisitions with capital obligations across or bsinesses. Additionally, we may not be sccessfl in integrating acqired bsinesses into or existing operations, achieving projected synergies, and/or maximizing the vale of acqired technologies and bsinesses. Competition for acqisition opportnities in the varios indstries in which we operate exists and may increase, thereby potentially increasing or costs of making acqisitions or casing s to refrain from making frther acqisitions. We are also sbject to applicable antitrst laws and mst avoid anticompetitive behavior. These and other acqisition-related factors may negatively and adversely impact or bsiness, financial condition, and/or reslts of operations. Intellectal Property. We believe that or patents and trade secrets provide s with a competitive advantage in atomotive rearview mirrors, variable dimmable windows, and electronics, althogh no single patent is necessarily reqired for the sccess of or prodcts. 22 / / 71